Prepare for the Christmas cash flow squeeze with Debtor Finance

Conditions this Christmas are likely to continue to be uncertain, with retail figures remaining weak, a string of major insolvencies, a slight rise in unemployment and the ongoing squeezing of credit and bank overdrafts. Trade payments continue to be well above standard trading terms (almost double) according to Dun and Bradstreet’s trade payments analysis and business insolvencies are still well above pre-GFC levels, in part because of the ATOs reduced tolerance of tax arrears and a general tightening of trade credit from suppliers.

Unless you are an ice cream seller at a beach or a removalist firm, which traditionally have their busiest trading over Christmas and into the new year, it is important to start preparing now to cover costs and maintain strong cash flows when business is traditionally quiet. At this time, the nation goes on leave, accounts staff are harder to contact, and many businesses are on skeleton staff, so anticipating cash shortages is critical. Without adequate planning now, the business may have to deal with serious issues next year, restricting its ability to benefit when trading does start to pick up after the drought.

Fast growing young businesses are particularly at risk. In the rush to grow, it is often the fundamental business practices – such as getting sound credit control procedures in place – that are left at the bottom of the ‘to do’ list, yet growing companies are the most hungry for cash flow funding. A key risk for such businesses is overtrading, where the cost of financing sales exceeds the working capital available. The problem results in blowouts in payables and receivables, increased financing costs and lower margins, and can be fatal. In such situations the business may need to slow down sales or investigate working capital funding to better align sales with production/fulfilment.

1. Preparation is key – plan effectively. Look back on last year and try to anticipate demand. Similar trends are likely to occur on an annual basis, so make sure you can cope with them.

2. Staff matters – consider seasonal recruitment as temporary staff can fill the gap and deal with increasing levels of demand without turning into a long-term business cost.

3. Cash control – ensure your cash flow is stable throughout the Christmas period. If necessary consider alternative methods of funding such as debtor finance to guarantee your business has a flexible supply of working capital during this peak sales season.

4. Take stock – endeavour to monitor stock levels carefully. Having enough to fulfil orders is imperative, but don’t over stock to the point where all your money is tied up in stock that you may not necessarily be able to sell.

5. Never promise what you can’t deliver – beware of over-trading at this time of year. Don’t take on contracts you can’t fulfil as it can damage your company’s reputation. New customers are always exciting, but don’t ignore your long-term customers as they provide loyal custom throughout the year.

6. Get up to speed – It’s good to have as much paperwork out of the way as possible before you close down for the Christmas break. Also make sure that any bills that require payment during the holiday period are paid promptly.

7. Open all hours? – Make sure all your customers know exactly when you will be closed well in advance. It is also vital to find out when your own suppliers are taking their break as this may affect the level of service you can offer your own customers at these times.

8. Seasonal Security – make a note of your security procedures and key holders before you close down. Make sure your answer machine is updated regularly and don’t send automated responses to emails saying there is no one there, as this is an open invitation for thieves.

9. Party time – reward your staff by organising a Christmas party. It doesn’t have to be something expensive to show you value their hard work and it is a great tool for boosting staff morale, rewarding loyalty and encouraging team spirit.

10. Take a break – it’s hard work running your own business. By taking some time away from office life, you will return refreshed and rejuvenated ready to implement all the fantastic ideas you have for the business in the coming year.

Aside from the basics, there are a number of funding tools available besides the overdraft, to ensure reliable cash flow in such conditions. Debtor Finance allows a business to convert their unpaid invoices into cash quickly, and in essence is a line of credit extended against the business’ receivables, often one of the largest current assets on the balance sheet. In a typical facility, the lender will advance between 60-80% of the face value of the business’ invoice within 24 hours, with the balance returned to the client on payment by the debtor. In some cases the lender also provides an accounts receivable service, helping to save time and accounts receivable cost. The service may also be offered confidentially. Some lenders can also set facilities in only several weeks, and real estate security is not generally required.

Benefits of Debtor Finance:

Does not require property security, thereby minimising directors risk
Funding grows in line with sales, to better match the businesses working capital requirements with availability
Less time and resource can be spent on debtor management, to be devoted elsewhere
Existing loans can be paid down or extinguished
Early settlement discounts can be reduced or withdrawn to improve margins
Helps smooth out seasonal peaks and troughs in cash flow

Cash flow is king, and monitoring it in the current environment should be a high priority, and should your business be facing any immediate or anticipate cash flow shortages, examining debtor finance could be advisable. The environment will become more challenging, so now is the time to prepare.

bibby.com.au

Source: Bibby Financial Services Australia Pty Ltd 2012
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